Exploring the Landscape of Tokenisation: A Recap of the DST Conference 2023
Rundown of the key topics from this year's conference in Frankfurt.
In this post I have tried to summarise topics discussed at a recent conference on the topic of ‘tokenisation’. Sorry if it feels a bit like a dry rundown—I'll be back soon with some juicier takes and opinions. Stay tuned!
The Digital Securities and Tokenization (DST) Conference convened in Frankfurt with over 250 in-person participants and over 1000 online attendees, uniting traditional banking institutions and those from the web3 domain to explore tokenisation.
Presentations and panel discussions revolved around opportunities, challenges, and trends in tokenising financial assets, with a consensus that we are still in our industry's early 'proof-of-concept' phase. Nevertheless, promising use cases and successful implementations are gradually surfacing.
Radoslav Albrecht from Bitbond discussed the versatility of asset coverage through tokenisation and presented some of those use cases. He cited Raiffeisen Bank's initiative to tokenise gold to reduce settlement costs, VP Bank's tokenisation of collectibles to provide their private clients with fractionalized investable assets, and Limewire's token sale targeting global retail and institutional investors. Siemens' tokenised bond offer was also frequently mentioned as a successful case study of a large corporation participating in this domain.
Despite these examples, many participants felt that significantly more case studies are needed to signify critical adoption and to fully realise the benefits of distributed ledgers. Dr. Philipp Sandner from Frankfurt School Blockchain Center echoed this sentiment in his introductory remarks, pointing out a ‘gap’ and expressing a desire for more instances like Siemens. The attendees unanimously agreed on the industry's direction, evidenced by the fact that most large financial institutions now have dedicated tokenised leads and are executing several early projects often together with start ups.
The panels were naturally optimistic about the future of financial asset tokenisation, citing the World Economic Forum and Boston Consulting Group's paper predicting that $16 trillion of assets (representing about 10% of global GDP) will be tokenised by 2030. One participant went as far as quoting that “everything that has value will be tokenised”. As tokenisation becomes more mainstream, Michael Duttlinger from Cashlink noted that the focus will shift from the technology itself to its benefits and applications.
These benefits, frequently discussed during the panels, include cost-cutting and efficiency improvements in financial institutions by eliminating intermediaries and automating processes, fractionalisation of shares, access to new asset classes, increased liquidity, and enhanced transparency. However, the latter point is a double-edged sword, as there are concerns about revealing sensitive information and IP, especially for regulated financial products.
And there is no better place than witness this the benefits of interoperability and composability in play than in DeFi. Kasper Luyckx from Crypto Finance showcased the concept of 'Money Legos', exemplifying the interoperability and composability of DeFi. His example involved an individual staking Ethereum, using it as collateral for a loan in a stablecoin, providing that stablecoin as liquidity on an exchange, and continuing the process with other protocols.
This frictionless interaction between different protocols is made possible because they all use the same standard and can communicate peer-to-peer on the blockchain network.
However integrating this promising technology into today's financial system today presents considerable challenges. Nisha Surendran from Citi pointed out that the biggest obstacles aren't technological, but rather about creating a compelling business case for a new, untested system that's disconnected from the traditional financial system, which '“for better or worse, works… and people have learned to live with” .
She further described this immediate potential at the extreme ends of the financial spectrum of the 'barbell', with the middle part expected to follow later.
Institutional Investors, according to Christoph Hock from Union Investments, are primarily looking for a safe, regulated, and trustworthy environment and secondary to that, performance achieved by removing intermediation. As the market matures, investors will focus less on whether they're purchasing a crypto security or a traditional one, and more on the underlying mechanism's trustworthiness, asset accessibility, and user experience.
Indeed, the theme of trust was brought up frequently throughout the conference, particularly in the aftermath of incidents involving FTX and Tera Luna. As Matthew Low from Fasanara Capital pointed out, these events have underscored the need for distinguishing different types of digital assets. They've spurred a realisation among the public that not all 'crypto' is the same, thereby fostering a more nuanced understanding of what distinguishes a cryptocurrency from other types of digital assets.
The conference touched upon considerable barriers to the adoption of tokenisation, with regulation being a major hurdle alongside other issues like the absence of a secondary market, underdevelopment of infrastructure, the need for standardisation, and fragmentation. The pathway towards adoption, according to Benjamin Duve from BNY Mellon, should draw on existing liquidity pools and the strengths of conventional financial systems, whilst embracing innovative technology solutions.
Other challenges discussed included establishing trust, achieving a critical mass of participation for blockchain-based projects to start delivering value, managing the interaction of new code with legacy systems, and confronting operational risks. As Alain Otaegui from European Banking Authority pointed out, these risks encompass ICT risk, cyber risks, reputational and legal risks from the governance of new DLT networks, and risks associated with outsourcing to potentially third-country controlled blockchain platforms or networks.
Indeed, achieving standardisation is a complex process. Each industry comes with its own unique set of considerations, necessitating the development of suitable market infrastructures. Some aspects, such as the tokenisation process and custody, share common characteristics across industries. However, numerous other elements, including distribution, much discussed Delivery Versus Payment (DVP) through smart contracts, management of lockup periods, the minting and burning of tokens, automation of payments (e.g., recurring coupons), and compliance functions like whitelisting etc, do not follow a universal standard.
As Michael Duttlinger from Cashlink noted: “it's not that easy to marry both capital market infrastructures (new and old). So at the beginning we will see two capital market infrastructures in parallel, they will merge at some point.”
Barbara Schlyter from DWS provided a nuanced perspective on this ongoing evolution. She acknowledged that in the midterm, tokenisation of a fund unit would be interesting to pursue due to potential efficiency gains, which stand as a prominent argument in favour of tokenisation. "You would hope," she said, "that you would have a leaner, more efficient fund issuance and distribution value chain." However, she also tempered expectations for the short term. According to her, establishing such a system is challenging because it essentially means building a parallel infrastructure. This, she argued, could result in reduced liquidity and fewer market participants in the initial stages.
The discussions also touched on the balance between transparency and privacy in the context of blockchain and digital asset rails. While public blockchains offer transparency, there are concerns about revealing sensitive information and IP, especially for regulated financial products. The need for different levels of transparency, depending on the use case, was highlighted.
Regulation was a primary topic, especially in the early sessions of the conference. The participants generally viewed the iterative regulatory environment in Germany and Switzerland as progressive and beneficial, giving these markets a competitive advantage over other regions. This regulation (lead by eWPG and MiCA) seems to be driving some of the institutional adoption in this space, and the first few sessions of the conference were devoted to this topic. At the end of the day, digital assets should have the same legal and regulatory clarity as traditional security. However, there is still much to be done: regulations are not consistent, even across the EU, they are costly to comply with, and still lack comprehensiveness.
Dr Stefan Berger from the European Parliament summarised the main pillars recently announced MiCA regulation (coming in full force in December 2024), addressing its categorisation criteria: e-money tokens, asset reference tokens, and utility token, as well as disclosure and capital requirements. Can Europe become a Crypto Valley? He answered this by saying that we should ask not what regulation can do for you, but what you can do with this regulation!
Finally, attendees agreed that industry education is critical for driving further adoption. This includes educating company employees, regulators, stakeholders, potential investors, and the broader public about the potential and challenges of the technology. Galaxy with Deka, for instance, is building a Digital Asset Academy to facilitate this education, a ten-week program covering various aspects of digital securities. They are considering opening this academy to external participants in the future.
For those wanting to take a deeper dive, might want to check out my personal notes and summaries of panels, highlights, slides, and select transcripts.
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